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Month: November 2017

Quote: Disputes happen (my sanitized version of the often used phrase of unknown origin.)

It is tough to be in the business of serving entrepreneurs and not encounter a dispute or two between owners. I am not referring to the garden variety disagreements that happen on a daily basis, but major differences that lead to paradigm change. The most common form of this conundrum is one owner firmly believing that the glass is half empty and one adamant about the glass being half full. In this scenario, the more optimistic owner dreams of the future and touts expansion, investing and new hires; the pessimist blocks him at every step setting up an unworkable situation. So what do you do?

One of the techniques I have seen employed is to bring in outside consultants to set up processes to both help clarify the true nature of the differences as well as resolve them. One of my clients often used the phrase “says easy; does hard” and that is what I usually found with this technique. When people really have different business philosophies, it is difficult at best to identify all of the differences and just when you think you have, new ones seem to surface. Obviously, if you can’t fully identify the problem, you can’t resolve it. The stark reality is that in some business relationships, there exists what is referred to in many divorce filings as “unreconcilable differences” and when they are deep seated, attempts to resolve them almost always lead to failure.

Unfortunately, in this situation the only viable solution is the difficult separation / buyout / settlement approach. Now those that have followed my blog know that I am not a fan of liquidity provisions in shareholder agreements. Even if a price is set in advance, getting the appropriate financing can be a major hurdle. For some reasons, banks are not interested in loaning you money that is going to an important “former” partner and out the door leaving the debt behind to be serviced by the survivor. However, when this type of situation arises, in many cases the future of the enterprise is at stake so it is imperative that a separation be negotiated.

These transactions are very emotion packed and much like a married couples’ divorce, value seems to manifest itself not in the true worth of the item being negotiated but in the perception one owner has as to the importance of the item to the other owner. So terms and conditions as well as price suddenly carry with them a level of unreasonableness fueled by the years of feeling underappreciated or maligned and getting a deal done takes on a whole new level of difficulty.
So my advice here is first, to start a separation process if it is clear there are major business approach differences and engage advisors who are used to dealing with this type of situation. Qualified lawyers and advisors who have not dealt with this before tend to treat this as a normal sale which only delays the process. And be prepared to be patient because emotions add to the timeline, but do not place your business at risk by avoiding the issue. Unfortunately as we all know, disputes happen.

“Dopus. I already had the money in my hand.” – Comicus quote from “History of the World” by Mel Brooks

At times, an entrepreneur is so focused on closing the deal for financing that they forget some of the long-term ramifications. In this scene from History of the World, Comicus is willing to say almost anything to get his weekly stipend. But is this approach dangerous for a business owner seeking financing? After all, money is money and it doesn’t come with a personality — or does it?

We have all heard the expression “smart money”. When one is discussing a successfully funded venture, it is common to hear the phrase “that’s where the smart money is.” Investment advice is often laced with terms such as “that is what the smart money is doing.” While I think you get the point, the question has to be raised: “Is there such a thing as dumb money?” I submit to you that there definitely is. The real question is how to avoid it.

Most owners seeking financing have this uniform image of an investor — serious, numbers-oriented, like Jack Webb (there’s a dated reference for you) they just want the facts. But smart owners do some diligence on their potential partners, and the wise ones know those traits that can come back to haunt you. So here are some warning flags.

Watch out for self-promoters. There is nothing wrong with having some pride in what you have accomplished, but the potential investor who goes on and on about their value proposition, including name dropping like they are some gossip columnist, has to be vetted with a cautious eye. When the next words you expect to hear are “enough of me talking about me; why don’t you talk about me for a while,” it is time to put your private eye glasses on.

The over-promiser is another type to take with a grain of salt. I have been in many meetings where investors are making their pitch and they mention connections they have that can really help the business grow. I can’t count the number of times these conversations resulted in companies accepting these investors, only to find that the two or three contacts they mentioned at that key meeting are in fact the only contacts they have. This is what I call the “big hat; no cattle” approach.

Finally, be careful when confronted by the smartest person in the room. This type tends to look down on the entrepreneur as if they are not worthy to be on the same planet. Without really analyzing the facts, they are quick to point out how something should be done differently and how they will add value by their vast knowledge.

The one common element is: if an investor is really going to help you (besides funding you), they have to understand you. As Stephen Covey advises, “Seek first to understand; then to be understood.” The types noted above may be past the point of being able to listen and understand. And by the way, it is not so much that they are dumb as it is they are not capable of using their smarts effectively. So make sure when you seek investment, you do not get stuck with dumb money because, in the long run, it will be a very painful step in your journey.

This blog is dedicated to all entrepreneurs. At its core, is an author who has been passionate about them since childhood and has had the privilege of guiding and at times, comforting them at every stage from start-up to growth to mature for over 35 years. This unique lifelong process allowed me to assemble helpful tools, processes, lessons and some good old “Dutch” uncle advice. This blog is meant to share (with some humor, hopefully) as much of that as possible with those that truly drive the economy - our entrepreneurs.

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